The “Internet of Things” and the Financial Services industry

The Consumer Electronics Show (CES) is an annual industry extravaganza and it took place, as usual, in Las Vegas earlier this month. This is where all kinds of firms showcase their latest and greatest consumer tech offerings to the world, with the focus typically on one or two big themes. This year was no different.

Much of the excitement at this year’s event was around the Internet of Things, or IoT, as the cognoscenti refer to it.1 The Internet of Things includes anything and everything that is connected to the Internet and able to communicate and share information with other “smart” devices. These may include home appliances, fitness and health monitors, home security systems, light bulbs, audio systems, temperature control equipment, etc.

In keeping with that theme, a number of firms displayed a staggering array of gadgets at this year’s CES, ranging from smart cooking pots and toothbrushes to wearable technologies like watches and clothing.

To be sure, the IoT is not really a new concept. The technology industry has been talking about this for a while now, with some people equating the IoT with the industrial revolution. They claim a profound transformation lies ahead in ways humans and machines interact with each other.2

But in real terms, what might this mean for the economy?

Estimates of the size of the IoT market vary. For instance, Gartner expects it to include nearly 26 billion devices, with a “global economic value-add” of $1.9 trillion by 2020.3 Others are more optimistic: The International Data Corporation (IDC), for one, estimates that the universe of things connected to the Internet will generate nearly $9 trillion in annual sales by 2020.4

One may wonder whether this is just hype or an inevitable evolution in how people, objects and networks will interact in the near future. Some recent advances suggest this is for real. We already have products that use sensing and communication technologies in a range of consumer sectors, such as self-driving cars and geospatial sensing on mobile phones. We are also seeing applications in business, with supply chain management being a focal area.

An obvious and critical challenge that the IoT industry is likely to face is in the area of security and privacy. With the explosion of devices, cybersecurity takes on a whole new dimension – not just for institutions but also for consumers. Digital vulnerabilities are likely to expand exponentially.

The question for us in the financial services industry is how we should respond to this growing phenomenon. What does the IoT mean for how we communicate and interact with customers? Contrarians may argue we are in the business of providing services, not “things,” so we needn’t pay much attention to this. In my opinion, that might be a short-sighted view.

We are already seeing this concept applied in insurance through telematics (monitoring driver behavior for car insurance). Other potential applications in insurance are life, health and homeowners insurance and worker’s compensation in the commercial arena.

How can other sectors such as banking and investment management leverage the IoT technology?

Some applications that come to mind are ATMs, information kiosks in bank branches and credit/debit cards that may use sensing technology to monitor and take action on the consumers’ behalf. Another big potential may be the connection of financial services (such as checking, credit card, or investment accounts) to some of the common household devices.

For instance, imagine a personal health monitor that is also connected to your investment account. At the sign of any serious health hazard (say a heart attack), the investment account could automatically rebalance to limit your downside exposure, or transfer your holdings to more liquid securities, in anticipation of future cash needs. This may sound a bit far-fetched now, but is not completely out of the realm of possibilities.

Other applications may be possible in the middle- and back-office functions at banks, insurance firms and investment management shops that could potentially benefit from the IoT technologies.

Again, such innovations also come with new risks. The deluge of new data is likely to complicate data management for financial services firm. And of course, cybersecurity may become an even greater challenge.

We cannot know all the answers here and now, but my takeaway from this year’s CES is that the financial services industry ought to be proactively thinking about how to deploy the IoT technologies in the way it serves customers.1Kim Peterson, “’Internet of Things’ all the rage at the Consumer Electronics Show,” CBS Moneywatch, January 7, 2014.2Steve Johnson, “Internet of Things promises profound transformation, could rival Industrial Revolution," Mercury News, January 8, 2014.3Peter Middleton, Peter Kjeldsen and Jim Tully, “Forecast: The Internet of Things, Worldwide, 2013,” Gartner, November 18, 2013.4IDC, “The Internet of Things is Poised to Change Everything, says IDC,” Press Release, October 3, 2013.

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